October 29, 2017

The narrow leadership provided by the Dow Jones Industrials Index did what narrow leadership often does in this market, which is to simply pass the baton off to another group of narrow leadership.

With Friday’s post-earnings gap-up moves in four of the biggest of the big-stock NASDAQ names on Friday, Amazon.com (AMZN), Alphabet (GOOG), Intel (INTC), and Microsoft (MSFT), the big-stock leadership baton, at least for the day, was passed from Dow names to these and other big-stock NASDAQ names.

In the process, the NASDAQ Composite Index gapped up and ripped higher into all-time high price territory on heavy volume. Obviously, on its face, this is bullish action, with the index notching its biggest one-day gain since November 16, 2016. Notice also that this big gain comes after the index was looking a bit shaky along its 20-dema earlier in the week. What a difference a day makes!

As the Dow Jones Industrials Index ran in place, up only 0.14% on Friday, the S&P 500 Index posted a little more than 1/3rd of the NASDAQ’s 2.2% move by running up 0.8%. In the process, it broke out to all-time highs as well on higher volume.

While the corkscrew rush into first the Dow names last week and then the NASDAQ names on Friday gives the market a wild feel, one’s focus, as I have discussed in recent reports, should be on the individual stock set-ups that can arise after earnings are reported. Nowhere was this more evident than in the action of ServiceNow (NOW) and First Solar (FSLR), two names that have been a staple of this report for many weeks and months now.

NOW, in fact, was a carbon copy of the example of Alibaba (BABA) that I discussed at the end of my October 15th report. I talked about BABA and its big undercut & rally (U&R) move back in May of this year after reporting earnings. After earnings came out the evening before, on October 14th, the stock gapped to the downside in brutal fashion, but undercut a prior low in the pattern and rallied above it.

As we can see on the daily chart of BABA from May, this triggered a U&R buy at that point, and the stock ended up nicely for the day. It then moved tight sideways along the 10-dma until gapping up on a buyable gap-up (BGU) move in early June.

More Cloud Names:

Fast-forward to Thursday, October 26th, and we see ServiceNow (NOW) doing the same thing after reporting earnings Wednesday after the close. The stock gapped down at the open, busting the 20-dema in bearish fashion while undercutting two prior lows in the pattern.

Not too long after the close, NOW then turned back up through those two lows, triggering a U&R long set-up at that point that was reminiscent of BABA’s action at the time. That took the stock back above the 10-dma. On Friday, it held tight as volume declined but remained well above average as the stock found intraday support at the line. Pullbacks closer to the 10-dma from here would serve as lower-risk entries.

NOW has made it through earnings, so if I’m looking to play a cloud name I’d rather focus on it than its other cousins, such as Saleforce.com (CRM) and Workday (WDAY). Both CRM and WDAY will report in mid-November and late November, respectively.

CRM is extended currently but I would note that the stock cleared the $100 Century Mark for the first time on Friday, which is technically buyable using the 100 price level as a selling guide. WDAY remains within an eight-week base and is only buyable on pullbacks to the 50-dma at 106.03 with the idea of catching a nice upside move before earnings, which are expected on November 30th.

WDAY’s weekly chart looks constructive, with tight weekly closes dominating the action over the past three weeks. Weekly volume has steadily declined each of the three weeks while at the same time the stock has closed near the peak of the weekly range after finding support near the 105 price area. This action is also much tighter, and hence more constructive, than the prior choppy action that has dominated the pattern over the prior four months.

Just to quickly review the rest of the clouds on my watch list, Tableau Software (DATA) (which also posted a pocket pivot off the 20-dema on Thursday) is expected to report earnings on November 2nd, next Thursday, while Square (SQ) is expected to report on November 8th but is currently extended after posting a pocket pivot on Thursday off the 10-dma. The stock is clearly a monster, and has been a mainstay of this report all year long.

Solar Names:

Another in-your-face BGU set-up after earnings came in First Solar (FSLR) on Friday after it reported earnings on Thursday after the close. The stock opened at 52.02, pulled down for a split-second to an intraday low of 51.71, and then launched to an intraday high of 58.97 before settling in to close at 57.67.

The intraday peak was hit within the first 1.5 hours of trade on Friday, and is one of the few times I’ve seen a stock produce a 13% gain in 90 minutes. This is now extended, and one could think about selling some shares into this move if it continues this week. One could then wait to see if and how it sets up again on any consolidation of this very heady one-day price gain.

FSLR’s cousin, SolarEdge (SEDG) was the only other solar-related name that seemed to respond in sympathy to SEDG’s move as most just sat there or moved up only a small amount. SEDG pushed to higher highs, but has been extended since last being buyable at the 20-dema a couple of weeks ago per my prior comments. SEDG is expected to report earnings on November 8th.

Financials:

A 3% preliminary GDP number on Friday kept the rising interest rate scenario intact. A quick tour of the big-stock financials shows Bank America (BAC) and J.P. Morgan (JPM) looking like twins as they both get extended to the upside. Wells Fargo (WFC), after posting a moving average undercut & rally at the 50-dma two Fridays ago, as I discussed in last weekend’s report, is on the verge of breaking out.

Meanwhile, Goldman Sachs (GS) is trying to stop spinning around as it pulls into its 20-dma on below-average volume, which puts it in a buyable spot using the 20-dema at 240.15 as a tight stop. Citigroup (C), which up until early October was the top-performing big-bank stock, looks like it may be trying to set up again in anticipation of a “LUie” type of move.

C was hit on heavy selling volume over two weeks ago after it reported earnings, but it has since settled down to retake its 10-dma and 20-dema. On Friday, it settled into the two short moving averages and held support, closing up on the day on light volume. This puts it in a possible lower-risk entry position using the confluence of the 10-dma and 20-dema as your selling guide.

All this action among financials keeps the Financial Select Sector SPDR Fund (XLF) in its uptrend but slightly extended from its 10-dma. I’m only a buyer on pullbacks to the 10-dma from here, although a pullback to the 20-dema at 26.32 would be the most opportunistic entry.

Big-Stock NASDAQ Names:

The big one was Amazon.com (AMZN), which reported whopping earnings growth of precisely 0% on a 34% increase in revenue. Common sense might tell you that their costs are also increasing, which in the old days might have been an issue. But in a market where stocks are the new bonds, this just leads to a big, buyable gap-up (BGU).

AMZN opened at 1058.14, pulled back to and set its intraday low at 1050.55, and then proceeded to romp through another Century Mark, one past the Millennium Mark, to close at 1100.95. That was a 13.22% move. It is now extended.

However, if you are a fan of buying base breakouts, it has cleared what I consider to be the mythical buy point represented by the peak of the base way over on the left side of the chart. That would be the 1083.31 breakout “buy point” of which the slower animals in the herd are so fond of.

Technically, the stock is within “buying range” of that breakout point, although for my money I would have just preferred to enter on Friday’s BGU near 1055. For me, it’s the difference between embracing new methods vs. clinging to old methods, and in the process running at the front of the herd.

Money also went flying into other alt-currency types of big-stock NASDAQ names after earnings, including Microsoft (MSFT), which reported -5% earnings growth (yes, that was a negative 5%), but gapped up to 84.37, reached an intraday peak of 86.20, and then closed at 83.81, below the opening price. That was 20 cents above the 83.61 intraday low, so technically this is buyable as a BGU using 83.61 as your selling guide.

Intel (INTC) posted a buyable gap-up after reporting earnings Thursday after the close. It opened up at 43.30, set a low at 43.10, and ended the day at 44.40, sixty cents below its intraday peak. This is coming after a prior uptrend, so it’s questionable how much further upside exists in the stock, although technically the BGU is buyable using 43.10 as your selling guide.

AMZN was clearly the most powerful big-stock NASDAQ name today, with MSFT’s BGU fizzling a bit. Alphabet’s (GOOGL) BGU also fizzled out a bit today as it closed near the intraday lows and less than 1% above the 1026.85 intraday low. Technically, this is buyable as a BGU, using the 1026.85 level as your selling guide.

I prefer to see BGU’s act more like AMZN, although GOOGL’s, and MSFT’s, for that matter, BGU is also actionable using the prescribed selling guide per the rules of buying BGUs. GOOGL also held above the top of its prior base, and within “buying range” of the base breakout “buy point” at 1016.31.

Apple (AAPL) is expected to report earnings this Thursday, November 2nd, but that didn’t keep it from joining the wild NASDAQ party on Friday. Here we see the stock posting a strong-volume pocket pivot that is also a trendline breakout. If you caught that move as it was starting on Friday, you got a nice trade out of it, but I’m not sure I’d want to play earnings roulette by holding through Thursday.

Facebook (FB) is expected to report earnings this Wednesday, but, like AAPL, this didn’t prevent it from joining in on Friday’s NASDAQ gap-fest. In fact, FB, like AAPL, was looking a bit grim on Thursday, but it sprang to life like a Halloween zombie to post a big-volume base breakout. This is made to order for you base-breakout lovers as the stock is within range of the breakout buy point!

The question is whether you’d want to hold FB through expected earnings on Thursday. Speaking for myself, I’m not so sure, but if AMZN can post 0% growth and MSFT -5% growth and still gap sharply higher, what could possibly go wrong with FB? Stay tuned for Wednesday’s earnings report and find out.

Netflix (NFLX) has rallied off the 20-dema, although it has done so in stalling fashion. Of course, nothing gets a stock’s blood boiling like big gap-up moves in other big-stock NASDAQ names. The NASDAQ big move on Friday took NFLX up above the $200 price level, but it closed just below at 199.54.

I’d watch to see if this sets up constructively closer to the 10-dma at 196.40 after previously being buyable along the 20-dema per my prior discussion of the stock. Friday’s action constituted a five-day pocket pivot, so another one along the 10-dma would be a positive development. Meanwhile, buying as close to the 10-dma as possible would be my preferred entry from here.

Tesla (TSLA) is expected to report earnings this Wednesday, November 1st. But it has provided a nice short-sale trade ahead of earnings, as I had hoped it would when discussing it as a short nearer to the 160 price level over a week ago. With the stock now at my original downside price objective at the 200-dma, this is a cover right here. It has done exactly what I had hoped it would do before earnings as a nice short-side trade. We can now sit back and see what happens after earnings on Wednesday.

Nvidia (NVDA) posted a new all-time high on Friday as it participated in the big NASDAQ buying spree. It is, however, extended with pullbacks to the 20-dema representing lower-risk entry opportunities. Keep in mind that NVDA is expected to report earnings on November 9th, so there isn’t much to do with the stock right here and now given its extended position.

Semiconductors:

Micron (MU) is sitting right at its 20-dema, where it found some minor support on Friday. This is still in a buyable position, using the 20-dema as a selling guide for shares purchased up at these levels. Meanwhile MU remains well above its September 27th BGU, down around 37, when I first discussed the stock.

Cavium (CAVM) is expected to report earnings this Wednesday, but it again found support at the 50-dma on Friday as it continues to hold up well on the right side of a potential new cup-with-handle base. One to keep an eye on when earnings are reported Wednesday.

Universal Display (OLED) is expected to report earnings this Thursday, November 2nd so I would lay back and leave this alone until earnings are out. It is acting constructively, however, as it holds tight along its 10-dma and 20-dema.

Telecom-Related Names:

Arista Networks (ANET) posted a new all-time closing high on Friday but remains within a short three-week price range. Earnings are expected this Thursday, November 2nd, so there’s nothing to do here ahead of earnings.

Lumentum Holdings (LITE) is holding tight after Tuesday’s range breakout, but with earnings expected on November 8th I don’t see much to do here unless I saw an opportunistic pullback to the 10-dma at 58.85, about four points below Friday’s close.

Bio-Tech/Medical Names:

This group is currently off my radar per my comments in the past two reports.

Chinese Names:

Alibaba (BABA) is expected to report earnings this Thursday, November 2nd. It did, however, regain its 50-dma on Friday after breaking below the line on Wednesday. Nothing to do here ahead of earnings. Meanwhile, with Sina (SINA) and Weibo (WB) both blowing apart earlier in the week, BABA remains the lone ranger among my previous China Five list of favorite Chinese stocks. Here today, gone tomorrow!

Cyber-Security:

Fortinet (FTNT) blew apart after earnings, which were reported Thursday after the close. The stock closed in the middle of a wide three-point price range on heavy selling volume. This is in no-man’s land right here, so is not actionable either as a short or long until it settles down following Friday’s “gooey kablooey.”

Palo Alto Networks (PANW) came down in sympathy to FTNT’s poor earnings report, but wasn’t hit with a deluge of selling the way FTNT was. It did, however, post a bearish-looking outside reversal to the downside on higher volume that was only 6% above-average.

PANW isn’t expected to report earnings until November 21st, so there is always the possibility that Friday’s ugly reversal was an Ugly Duckling buy signal! If one saw fit to test that theory, then the prior low along 145 would serve as a tight selling guide, while the 50-dma at 142.42 would serve as the widest selling guide. As always, I would favor the tighter selling guide

Internet Related:

Yelp (YELP) is expected to report earnings this Thursday, November 2nd, so there’s nothing to do here ahead of the report.

Software:

Veeva Systems (VEEV) is back in its happy place, down along the 20-dema with volume drying up to -43% below-average. This brings it back into buyable range, using the 50-dma at 58.35 as your maximum selling guide. VEEV is expected to report earnings on November 28th.

Nutanix (NTNX) is slightly extended here, and I would maintain an opportunistic posture here looking for a deeper pullback to the 20-dema as a possible lower-risk entry, should it occur. NTNX is expected to report earnings on November 29th.

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple (the magenta line), 20-day exponential (the green line), 50-day simple (the blue line) and 200-day simple moving average (the red line). On rare occasions, I will also employ a 65-day exponential moving average (thin black line). In all cases I will mostly use the shorthand version of “10-dma,” “50-dma,” etc.

Stocks are the new bonds. Friday’s action confirmed this concept as money veered away from Dow names poured into big-stock NASDAQ names, even those reporting tepid earnings and sales growth. This is not your father’s market. This is the QE market in full force as somewhere north of $15.5 trillion of QE and rising still sloshes around in the system.

Much of this money found its way into bonds, but late last year a shift began as shown on the daily chart of the iShares 20+ Year Treasury Bond ETF (TLT), below. Just before the election, bonds took a big dump, and then throughout 2017 have been in a shallow uptrend that ended in early September.

It was at that time that the Dow began to rip higher, and the TLT has since gone into a descent that has now carried it below its 200-dma. To my eye, it appears that the general pattern in 2017 has been money flowing out of bonds in the face of potentially higher rates to come and into stocks. That pattern continues today, and is why no-growth names that are established companies within their respective industries gain favor as “alt-currencies.”

If a vast ocean of QE is still out there, then it had to find a place to go, and lately that has been into stocks. While this is a “big think” sort of thing, it does, in my view, highlight the driving force behind this market, which is a heck of a lot of liquidity looking for a home.

I understand the argument that the current market rally is based on the Trump Administration’s business-friendly policies, but so far, we’ve seen nothing in the way of concrete legislation. Talk of tax cuts, tax reform, and “beautiful, wonderful” healthcare reform, has remained mostly that, talk. Certainly, the bio-techs find little that is friendly in the talk emanating from the current President.

There is also the argument that the main driver of this bull market is rising earnings. However, I would point out that inflation-adjusted S&P 500 earnings have yet to surpass the September 2014 peak of $109.29, yet the S&P 500 Index is more than 28% higher today than it was at its peak September 2014 level. The chart below illustrates this.

If we look at the change in forward 12-month EPS vs. the change in the S&P 500 price we can see that prices are currently accelerating up and away from current projected earnings growth.

While each chart is based on different calculations, the idea here is simple. It is not just S&P 500 earnings that are driving stock prices higher because we can see that prices are accelerating faster than forward earnings. In other words, there is a P/E expansion at work here. I’ve written many times that P/E not a measure of absolute value, but rather, and more truly, a measure of the market’s demand for a given level of earnings.

Bull markets and their associated P/E expansions are helped along by increased market liquidity. Therefore, I would argue that the driver of this market is what the driver of most bull markets is, which is a mass of liquidity chasing a finite pool of stocks, and we are dealing with historic levels of” liquidity. Adjusted S&P earnings aren’t 28% higher than they were in September 2014, according to the first chart, and no meaningful legislation has been passed by the new Republican-dominated government.

But there remains a record level of money in the system, and with money coming out of bonds, it must find a home somewhere else. Lately, that home is stocks. In the process, as I’ve become fond of saying, stocks have become the new bonds. Give that money a reason to come flying into stocks, especially big, established, dominant companies like AMZN, and it will.

With the NASDAQ posting its biggest one-day price gain in about a year, things did look a bit frothy on Friday. For that reason, I wouldn’t be surprised to see a pullback type of reaction at some point this coming week. However, this would likely be helpful in terms of bringing certain extended names back into lower-risk buying areas.

Meanwhile, investors simply need to watch their selling guides, because many have been triggered in bio-techs and China-related names. Many Chinese names have been under pressure for the past few weeks, while bio-techs have come under severe pressure over the past week or so.

On a more concrete level, my focus remains as discussed in recent reports. That is, to wait for opportunities to arise from earnings reports as they are announced by various companies. If the ensuing reaction produces an actionable set-up, then I’m in. Names like NOW and FSLR both are examples of this type of set-up materializing after an earnings report. All you need to do is wait for it. There is no reason to try and play earnings roulette.

And while there are actionable set-ups showing up after earnings reports, most notably on Thursday and Friday among names that I’ve been tracking as long ideas in recent reports, there have also been disaster stories. The bio-techs, including stalwarts like Amgen (AMGN), Biogen Idec (BIIB), Celgene (CELG), and Gilead Sciences (GILD), are laying on the ground bleeding.

Chinese names have also come under pressure, with BABA being one of the last holdouts in this area. We shall see whether it joins the equity flotsam and jetsam that is now the group of former China-related leaders like SINA, WB, MOMO, BZUN, NTES, BIDU, and TAL, among others.

As we progress through the remainder of earnings season, looking for set-ups after earnings reports remains my primary modus operandi. Note that I didn’t see much to do per my comments in Wednesday’s report. That situation changed somewhat on Thursday and Friday with BGUs and U&Rs occurring in some of my favored long ideas.

I would continue to advise that members be aware of companies that are reporting earnings on a daily basis. If something arises after earnings that creates an actionable long set-up, have a plan ready and then act accordingly, even if it’s in a name that I haven’t discussed in recent reports.

I would hope that most long-time members are fully capable of recognizing the set-ups for which I provide examples in report after report. Applying such knowledge to your own buy watch list and real-time ideas is simply the act of becoming empowered as an investor and, more importantly, as a Gilmo member. As always, it is simply a matter of playing it as it lies. Carry on.

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held a position in FSLR and NOW, though positions are subject to change at any time and without notice.